Pension board moves forward with loan plan

Middle market companies would get access to capital from fund

In the 1980s, after the U.S. Department of Labor ruled that pensions could devote a small portion of assets to such investments, many funds turned to venture capital as a way to generate profits. It was controversial and initially hugely lucrative.

“That was a huge boon for San Diego, for California, for the U.S. and for the world,” Bristow said. “Now decades later, those same venture capital funds are struggling to repeat these earlier successes — so pension managers are looking to direct lending. Buyer beware.”

Joe Nation, a former state lawmaker who directs a public policy program for graduate students at Stanford University, said pension funds that buy into direct-lending pools are “effectively gambling.”

“Clearly those are riskier. there’s no doubt about that,” he said. “If you’re swinging for the fences you might also strike out, and if you do you’re really stuck. You have obligations you still have to meet.”

Nation said too many public pension officials take unnecessary risks because they know taxpayers will bail them out if investments go sour.

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“If you have a pension system and the board knows their ultimate backstop is the taxpayer, they’re going to take risks that they might not usually take,” he said.

In his report to trustees, Kumar noted there are key risks to direct lending.

Chief among those are the small number of managers capable of overseeing the loans; a lack of standard terms; variances in collateral available for borrowers; and illiquidity, the idea that the investments are locked up for years.

San Diego County’s is not the only public pension system exploring direct lending.

In January, the Orange County Employees Retirement System investment committee voted to retain a firm to find managers for $104 million that the fund plans to invest in middle-market loans.

U-T Watchdog contacted the National Federation of Independent Business in California and the California Chamber of Commerce to see if the business community welcomes the added capital option. Both declined to comment.